Opening a pension for grandchildren: economic future of the youngest generations.

Opening a pension for a child and investing money which they won’t access until they are in their 50s is becoming increasingly popular.

Opening a pension for a child provides the opportunity to provide a nest egg that will mature much later in their life. It is often used as an investment layer, so alongside other accounts such as an ISA, which is a savings and investment account that they can access at 18 years old, and inheritance provision made in a will.

Those in retirement are often looking for ways to reduce their Inheritance Tax bill, by gifting money to family members in a considered and thoughtful way. Pensions and ISAs offer the opportunity to gift money to a child now, but with the security that monies cannot be accessed by the child until a future date. Any money gifted 7 years prior to death, is not subject to inheritance tax. Therefore, gifting money into pension or ISA account for a child early, rather than leaving it in a will, can mean the money is not subject to a 40% inheritance tax charge.

Money gifted into a pension is often carefully and thoughtfully made. Grandparents understand better than anyone the importance of long-term financial planning and have experienced seeing their own pensions grow over time. They also understand the pressures on the next generation with the cost of housing and bills. Opening a pension for a child and investing a lump sum, or a small amount regularly is a significant financial gift. The combined effect of contributions, compounded investment growth of over at least 30 years and tax relief from the government means a child could have a substantial nest egg by the time they retire.

There are so many expenses for a child that a pension is an unlikely account for a parent to open. There are always more urgent things to pay for; school fees, driving lessons, and university fees are all financial hurdles that will come first. The advantage of being a grandparent is that you are able to provide the things for a child that parents might not have the bandwidth for. Whilst parents are covering the cost of everyday family life, it can be difficult for them to find the time to plan ahead for a child’s long-term financial future.

Whilst giving a child a pension may not feel like the most exciting present, in years to come they may look back and feel it is amongst the most valuable gifts they have ever received.

How do I open a pension for a child?

There are a few different options, but the most common is a Stakeholder Pension fund. A child’s pension can be opened from as little as £20, and you can pay in up to a maximum of £2,880 per annum net of income tax in a single tax year. Like an adult’s pension, it attracts tax relief which boosts the total paid into the fund in a year to £3,600 based on a contribution of £2,880.

A Stakeholder Pension can be opened by anyone interested in the child’s future. Grandparents, godparents, aunts and uncles can open an account. As long as the legal guardian of the child is aware the payments are being made, anyone can contribute.

You can also open a Self Invested Personal Pension for a child, which is sometimes referred to as a SIPP. A parent or guardian has to open a SIPP, and they are ultimately responsible for deciding how the money in the SIPP is invested. Control of the account passes automatically to the child when they turn 18, at which point they can make any decisions themselves on where they want their pension contributions to be invested, with or without the help of a financial adviser. But, as with a stakeholder pension, the cash will stay invested until they reach the age where they are allowed to withdraw it from a pension, which is set at 55 now, rising to 57 in 2028.

Like many other tax incentive savings plans, you have until the end of the tax year April 5th to use the current pension contribution annual allowance, but you don’t have to pay the full amount in. Most providers will let you contribute just £25 a month, and you can start and stop payments at any time and put in lump sums if a child is given a larger sum of money for a special occasion like a birthday.

What are the alternatives to saving into a pension?

Junior ISAs are an alternative way to save or invest for a child. A Junior ISA can provide more flexibility in terms of access to the money for other reasons other than retirement. From the age of 18, a child can withdraw the funds tax free and spend it on what they wish. Money saved into a pension however can only be used at retirement.


Past performance is not a reliable indicator of future performance.

The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.

All information correct at time of writing.

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